As the political cost declines, so will Canada’s supply managed dairy market

The end is coming for Canada's supply managed dairy market, not immediately, but almost inevitably.

That's not because U.S. President Donald Trump has claimed the Canadian system is unfair to U.S. farmers. The hypocrisy of a President who crows about an America First trade policy while demanding access to Canada's market makes one of the best arguments for keeping the protectionist system.

But the political market for supply management is weakening. For Canadian politicians, it will soon be more valuable to give it up in trade talks than it is to use it to buy the votes of dairy farmers.

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Mr. Trump's blast about Canada's dairy protections just underlined the fact that the U.S. wants concessions. That means that Canada can negotiate something in return, whether it is market access for steel pipes or lumber, or exemptions from border taxes.

To understand the potential value of those concessions, forget the relatively small $200-million in lost dairy business that Mr. Trump was complaining about when he called Canada's actions "very unfair." Focus instead on where he made his announcement: in Wisconsin, a politically sensitive swing state that is home to 9,000 dairy farms and House Speaker Paul Ryan. Mr. Trump promised to wrestle dairy concessions out of the Canadians. Now he can take credit for any concession, but he dearly wants one.

For decades, Canadian politicians couldn't even consider a deal that touched supply management. Dairy farmers would fight tooth and nail, and they had influence in rural and semi-rural ridings, especially in Ontario and Quebec. Political parties all pledged to preserve it.

But that political power is waning. There used to be more than 100,000 dairy farms in Canada, but by 2014 there were only 11,260, according to Statistics Canada. Half are in Quebec, but even there, the political unanimity is broken: Conservative MP Maxime Bernier is running for his party's leadership with a pledge to eliminate supply management.

The supply management system is designed to keep foreign products out and prices up. For dairy products, tariffs are set high to prevent imports while the Canadian Dairy Commission and provincial marketing boards set prices. To sell milk, a farmer needs to buy quota, worth tens of thousands of dollars for each cow.

The whole system was protected under trade agreements such as the North American free-trade agreement. But in recent years, U.S. dairy producers found they could sell a new product, diafiltered milk, a kind of milk-ingredient paste, to Canadian cheese and yogurt processors, because it wasn't covered by tariffs allowed under NAFTA.

Canadian producers couldn't compete. They were awash in skim milk – a leftover because it's the butterfat for products such as cream and butter that is in hot demand – but they had to sell it at higher, supply managed prices. So to stop the U.S. competition, the Canadian boards created a new class of milk, to be sold at lower, market prices, for sale to those cheese and yogurt processors.

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The Americans are annoyed. But they're no angels. They subsidize milk and other agricultural products. The Canadian action was market manipulation, Toronto trade lawyer Larry Herman said, but it's allowed under NAFTA. But remember, Mr. Trump wants to renegotiate NAFTA.

For Canadians, supply management isn't valuable. It protects farmers, but costs consumers. It can be traded away, piece by piece. Former PM Stephen Harper started that, granting limited market access in the free-trade deal with Europe and the now-defunct Trans-Pacific Partnership. Mr. Trump wants more.

"We're going to be talking about volume," Mr. Herman said. "How much volume do we give over time to get a deal?"

If it's a large enough piece, the managed market will eventually unravel.

Dairy farmers will object. But there are fewer. Under Mr. Harper, the Conservatives did calculations about the political costs of sacrificing supply management. They chose not to take big chances. But eventually, governments will worry less about the cost.

Imagine if Mr. Bernier becomes Conservative leader: Justin Trudeau's Liberals would face few political consequences for making dairy concessions to Mr. Trump. Even with a different Conservative adversary, Mr. Trudeau must consider that he can get a bargain on trade with a deal on dairy. The value of such concessions is going up, and the political cost is on the decline.

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Video: U.S. trade ‘just fine’ after Trump calls out Canada: Ambassador(The Canadian Press)

Campbell Clark has been a political writer in The Globe and Mail’s Ottawa bureau since 2000. Before that he worked for The Montreal Gazette and the National Post. He writes about Canadian politics and foreign policy. More

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